Bind government to a better fiscal rule

Andy Mukherjee, ET BureauMar 6, 2009, 01.31am IST

Bond yields that are stubbornly high even after multiple rate cuts show a very real risk of state borrowings elbowing out the private sector. Logically, it makes sense for the Indian government to tap offshore debt markets with a sovereign debt issue. That will ease the pressure on local bond yields. But realistically speaking, the government can't go out and raise money overseas — not when our credit standing is so precariously perched at BBB, the last rung of S&P's investment-grade totem pole.

Five years ago, we had no way of knowing what the government's taxation and spending profiles would be in the year ending March 31, 2009. Nor had we, in May 2004, any way of judging just how big a tax bounty was going to come the UPA government's way as global risk capital, hungry for yield, lavished its riches on emerging markets. But we did know that the good times wouldn't last and one day the global credit cycle would turn. It was remiss of us not to plan government finances accordingly.

The Planning Commission, which rightly drew a lot of flak for suggesting that the FRBM Act be relaxed to find more resources for inclusive growth, was nonetheless right in saying that the targets for deficit be "cyclically adjusted." Now that we've seen how good times can be so easily frittered away, we'll hopefully devise a better fiscal rule.